Global Innovation Management Business Models

Global Innovation Management Why Business “Process” Models Matter “During the dot-com boom, ‘Business Model’ was a buzzword routinely invoked to glorify all manner of half-baked plans” -- Michael Lewis

Global Innovation Management Why Business Models Matter Telling a good story –Part of selling your strategy / investment Tying Narrative to Numbers –Strategy becomes less philosophy –More performance and outcome When business models don’t work It’s because the fail either –The ‘Narrative’ test –Or the ‘Story’ test

Global Innovation Management A business model is not strategy It doesn’t describe external forces: –Competition –Environment –Scaling It only depicts the systems that will be put into place to achieve a strategic objective A good model is not enough –The boxes on the value map need to be understood in depth –In order to develop a good strategy

Global Innovation Management Graphing the Value Map External competitive environment (supply & demand curves) Internal strategies, competencies, knowledge, assets ‘owned’ Value flows between owners and/or the external environment

Global Innovation Management The Context of Business Models

Global Innovation Management Value and Structure in Post-Dot- Com Business Models

Global Innovation Management Business Models Value Chain Integrator Uses both Electronic and Logistic Networks

Global Innovation Management Business Models Aggregator (e-Tailor)

Global Innovation Management Agora & Alliance Prosu mer Prosu mer Prosu mer Prosu mer Value Space

Global Innovation Management Business Model vs. Strategies

Global Innovation Management Evolution of ‘Strategy’

Global Innovation Management Outcomes and Processes Differing perspectives on Strategy

Global Innovation Management Classical (Porter) Perspective on Strategy Outside the Firm (Markets)

Global Innovation Management Two Questions How do low-cost and differentiated products come about? Why is it that some firms can offer them better than others?

Global Innovation Management Capabilities A firm’s assets and competences together –Make up its capabilities For example, –Intel Capabilities = integrated circuit design & semiconductor manufacturing Assets = patents, copyrights, installed base of PC’s (Intel inside), reputation, scientific expertise Competences = protection of intellectual property, fast product time to market, compatibility of new products with prior genrations

Global Innovation Management The Value Map Firms create that deliver low-cost or differentiated products –By performing the activities –Of their value configuration –(i.e., value chain, value network, value shop, profit chain) To perform these activities –A firm needs resources (assets): Manpower, money, machines, methods, materials Plants, equipment, patents, scientists, brand name recognition, geographic location, client relations, distribution channels, trade secrets

Global Innovation Management Value Map = The Resource Based View of Strategy

Global Innovation Management Framing the Challenge Task #1: Establish what your business needs to do to make innovation worthwhile What do we mean by ‘needs to do’? What do we mean by ‘worthwhile’? This is what will drive the Business Model

Global Innovation Management Facts of Life There is no checklist! Incremental improvement of existing products or business models is insufficient! –You must really make a difference Will your efforts yield a good return for your shareholders? –Exactly how?

Global Innovation Management Targets and Goals If I were to do something in the next 3-5 years –That my company’s stakeholders would regard as a major win –What would this performance record have to look like? If I were to do something in the next 3-5 years –That my customers would regard as a major (disruptive) innovation –How would I change their lives? How would my relation with customers affect my performance? Are your motivations different than elsewhere?

Global Innovation Management What Drives your Strategy? What’s your Strategy Driver? What makes your proposed business perform? What makes your proposed innovation a commercial success?

Global Innovation Management Reality Check Your text suggests a simplistic (but revealing) reality check –For any new business idea (click for the spreadsheet)

Global Innovation Management Typical Performance Targets Sales from 1% growth to the high teens R&D from 8% to 11% if Sales Reduce SGA from 27% to 19% Reduce tax rate 4% points Lift ROA from 0% to 1% What are your Strategy Drivers?

Global Innovation Management Trade-offs: Markets and Capabilities You best (perhaps your only) opportunities to compete are –Where Product Market Needs –Cross with Competences

Global Innovation Management You Convince Competitors and Financiers By … Proving that your ideas can perform on Key Metrics (e.g., Profit) »Show me the money! This raises the question: –“What are the important Metrics?” The answer is complex … and is not necessarily “Profit” Accounting metrics like Profit –Measure the Past Competitors and Financiers are interested in your future! –Future Profits, Revenues, etc. are Unknown Thus Other Measures both needed and More Important than Profit!

Global Innovation Management An Example of a Successful Business Model Mad Catz, Inc. Mad Catz, Inc.

Global Innovation Management Mad Catz Creative Tension: Design vs. Competences Core Competences are the things that the firm does –That they do better than other firms –That are the source of their competitive advantage They are not necessarily what the customer wants (!!) Firms establish their core competences by: –Investing in people –Investing in assets, plant and land –Identifying and focusing their mission How do you reconcile Mad Catz design and business model with their competences?

Global Innovation Management Mad Catz’s Products Controllers, Joysticks, memory chips, cables, power supplies, etc. –Anything you could add onto a game console Question: How do you make money on this market?

Global Innovation Management Mad Catz ’ Business Model (Value Map)

Global Innovation Management Points to Note about Mad Catz’s Business Model Sources of costs and revenues are different Cycle time influences revenue The product is 100% ‘human interface’ Visual Mental Tactile Their market is driven by other vendors –What does this imply about market and growth strategies Many components of this case are typical of Pearl River Delta companies

Global Innovation Management Mad Catz By outsourcing much of its production, and coordinating the entire production process –Mad Catz Controlled its profitability by being a Value Chain Integrator It was looking for new opportunities to –Control costs –Speed up time to market –Improve quality By innovations in both logistics and information networks

Global Innovation Management Mad Catz: Take Aways Look for cost – revenue spreads in the Business Model –Cut costs where revenues are small –Spend more if you can influence revenues with small additional cost Cycle time influences revenue –Look for possibilities for ‘Geographical Scaling’ –Through improvements in Information and Logistics networks

Global Innovation Management Mad Catz: Take Aways Market is driven by other vendors (not by your decisions) –Bet that Sony and Microsoft will be leaders, and pander to them –Consider game specific software for powerful software companies like EA E.g., branded controllers

Global Innovation Management Mad Catz: Take Aways Because the product is 100% ‘human interface’ –Consider the costs and benefits of professional industrial design What is Industrial Design?

Global Innovation Management Trade-off Workout Goal: Design a video Game Console using Morphological boxes Method: Write its Business Model and estimate the value from commercializing your innovation

Global Innovation Management Mismatch of Capabilities and Markets In the Mad Catz case we saw that Consumer Value (what consumers are willing to pay us) and Production Cost are often only loosely correlated Intelligent Design, then, requires that we give more weight to expenditures in some of the product Components than others

Global Innovation Management Your Task Design a game console using Morphological Boxes The next slide gives the features that your capabilities allow you to produce –particular components (chosen from columns) –with a given feature set (chosen from rows) Each adds some market value, and some production cost

Global Innovation Management Feature Choices Components Package Console CasingElectronicsScreenConnectivity Features Recycled PaperCheap PlasticBasicNTSC TVWired Colored plasticHard Plastic+VibrationPAL/multiInfrared Cloth caseLexan+Motion Sensor1024x768Wi-Fi Hard ShellBrushed Metal+Television1280x1024+Internet Metal with Velvet cushion Two-tone Clamshell +Body Suit1080i (i.e., 1920 × 1080 / 2 interlaced) + Other Consoles

Global Innovation Management Unit Profit Your marketing department has determined your customers’ valuation of features (their Willingness to Pay or W-to-P) Your production department knows the cost of these features You need to choose the combination of features that will yield the greatest profit

Global Innovation Management Volume In addition, your accounting department has determined how overall price influences (reduces) sales volume Volume (units) = ($700 – Sales Price)*10,000

Global Innovation Management Feature Costs and Potential Revenue Following slide breaks a game console into its feature costs and potential revenue –Represented as a Morphological Box Profit depends not just on unit profit, but volume of sales The more expensive the entire product, the lower the sales volume

Global Innovation Management Morphological Box The 5x5 box below gives Cost of providing, and Willingness-to-pay (i.e., maximum price) For a particular feature Mix and match features for the most profitable console

Global Innovation Management To Present 1.What is the feature set of your most profitable product? 2.What would you call this product? 3.Is it high end, low end, or intermediate? 4.Who are your competitors? 5.What are substitute products for this one? 6.How can you increase the volume of sales? (think of complements) 7.Draw your Business Model with bubbles, arrows and boxes

Global Innovation Management Assessing and Managing Capabilities

Global Innovation Management Choosing Your Competitive Terrain Each new business model –will demand shifts in your firm’s capabilities –to allow you to compete in new markets –with unfamiliar competitors You will need to decide how ‘best’ to: –Choose your competitive terrain –To enter your chosen market(s) –And to marshal your assets, investments and competencies

Global Innovation Management Trajectory of your Markets and Capabilities ‘Vision’ Where you think your firm, product and market will be at some point in the future Is how you summarize your view of the competitive trajectory you will take

Global Innovation Management The Resource Based Perspective The migration of capabilities over time –Reflects evolution of the R-P-V –To changes in the competitive environment

Global Innovation Management Trajectories What is actually happening to Markets and Capabilities Market trajectories are defined by whether –Firms competing in that market Find competences obsolete Or Assets obsolete –(capabilities = assets + competences)

Global Innovation Management Some Types of Change are More Common

Global Innovation Management Adaptive Execution Where the competition changes rapidly Firms cannot compete with a static strategy that will remain valid for years Rather strategy must be stated in terms of: –Condition  Response –Each competitive event needs to be met with a managerial response –These responses are the ‘Real Options’ that a manager has to respond to competition

Global Innovation Management Options on Strategic Decisions

Global Innovation Management When to be a ‘First Mover’ We will revisit this when we discuss Entrance Strategies Many dot-com investments were predicated on getting the money to become a ‘first mover’ in a field –In order to compete for ‘eyeballs’ (network effects) –Faith in the ‘first mover advantage’ is usually misplaced